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US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 4:35 pm
by tictock81
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this? I'm sure there's no free lunch, so I'm suspicious of such trickery - the vagaries of macroeconomics should wash-out any opportunities. However, it also seems a reasonable wager that an investment denominated in a weak currency could be profitable if purchased with a strong currency - the odds are neutral at worst and could be advantageous.

Assume:
1. Investor is based in the US.
2. The tilt is to new investment contributions only.
3. Global allocation of investments are rebalanced occasionally, but not often (every 2-5 years?)

Thanks in advance for your sagacious counsel.

Re: US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 4:57 pm
by NotTooDeepLearning
I think this strategy is plausible. The value of the dollar seems to experience long cycles that at least seem on the surface to be correlated to US outperformance on the upswings and international outperformance on the down swings.

I'm referencing this graph: https://fred.stlouisfed.org/series/TWEXB where US outperforms during the 90s, underperforms in the 2000s, and then outperforms again in the 2010s.

Re: US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 5:08 pm
by HippoSir
How does he determine the strength of the US dollar and what points does he use to tilt back and forth? Strategy seems interesting.

Re: US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 5:18 pm
by minimalistmarc
I think the strategy is pointless.

I am a Uk investor and invest 100% equities in the vanguard all world unhedged.

In most days the movement in the price is mirrored by the £ to $ exchange rate.

Maybe I’m misunderstanding, but in my opinion, it’s all priced in by the markets (equity and forex)

I know I won’t beat the equity indexes but I am even more certain I won’t outsmart the forex markets.

From a uk perspective, pound sterling “feels” undervalued against all the main currencies, but I’m not going to act on that

Re: US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 6:14 pm
by unclescrooge
If at some point we see mean reversion and the dollar weakens, his international holdings will do well.

Unfortunately that's been an underperforming bet for a decade.

Hopefully his resolve won't weaken over time.

Re: US$ Strong/Weak Tilt Investing?

Posted: Wed Dec 04, 2019 6:29 pm
by Taylor Larimore
tictock81 wrote:
Wed Dec 04, 2019 4:35 pm
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this?
tictock81:

Your coworker is not "tilting" (permanently underweighting or overweighting the total stock market). He is "market-timing" (changing his asset-allocation based on market forecasts).

The "Boglehead wisdom" is to select a personal asset-allocation plan--then stay-the-course.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Stay the course. No matter what happens, stick to you program. I've said 'Stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 8:13 am
by tictock81
HippoSir wrote:
Wed Dec 04, 2019 5:08 pm
How does he determine the strength of the US dollar and what points does he use to tilt back and forth? Strategy seems interesting.
He didn't explain this - it seems pretty subjective.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 8:20 am
by tictock81
minimalistmarc wrote:
Wed Dec 04, 2019 5:18 pm
I think the strategy is pointless.

I am a Uk investor and invest 100% equities in the vanguard all world unhedged.

In most days the movement in the price is mirrored by the £ to $ exchange rate.

Maybe I’m misunderstanding, but in my opinion, it’s all priced in by the markets (equity and forex)

I know I won’t beat the equity indexes but I am even more certain I won’t outsmart the forex markets.

From a uk perspective, pound sterling “feels” undervalued against all the main currencies, but I’m not going to act on that
This coworker is Dutch, living in HK, and basing investments on the strength/weakness of the USD (donno why). It's interesting to contrast your view with his. I can't explain exactly why, but I agree that trying to out-speculate the forex market will be heartbreaking. Maybe the key difference is that the forces driving the forex trade may not be relevant to than a particular investment (Example: the Pound value may be affected by Brexit but any particular investment in the UK may not be).

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 8:21 am
by tictock81
Taylor Larimore wrote:
Wed Dec 04, 2019 6:29 pm
tictock81 wrote:
Wed Dec 04, 2019 4:35 pm
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this?
tictock81:

Your coworker is not "tilting" (permanently underweighting or overweighting the total stock market). He is "market-timing" (changing his asset-allocation based on market forecasts).

The "Boglehead wisdom" is to select a personal asset-allocation plan--then stay-the-course.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Stay the course. No matter what happens, stick to you program. I've said 'Stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Fair enough Taylor; well said.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 8:41 am
by JoMoney
Good for taking foreign vacations and buying "stuff" to consume in a foreign currency, but I would be cautious about assuming it's good to keep money in a foreign denominated currency. If there is a positive carry being short non-U.S. dollars and long U.S. dollars at current interest rates, then there is a negative carry going the other way and you're effectively paying interest to keep your money in that foreign currency. These things don't stay that way forever, but nobody knows how long it might go.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 9:38 am
by mbasherp
In Vanguard’s 2020 outlook, they cite expected depreciation in the USD as one reason for expected international outperformance over the next decade. So while your friend’s method may seem arbitrary, Vanguard appears to be doing the same thing.

Personally, I don’t adjust my assets based on it but I’m not as concerned by underperformance of either class due to FX moves, because I expect that to reduce to noise over the long term.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 9:54 am
by asif408
This was proposed by Dimson, Marsh, & Staunton in the 2012 Credit Suisse yearbook: https://www.ft.com/content/941121c8-61f ... 144feabdc0

The thing is, though, this is not something that happens very quickly, generally speaking. I'd be curious how often he is trading. For example, EM currencies were weak in the late 90s early 2000s. They outperformed dramatically following that period, but if you started investing in EM in 1999 or 2000 you had to wait several years to get the outperformance. When EM currencies were strong (2007-2011), their forward returns for the next decade were poor, but they did pretty well for a few years after 2009. Now they are back to weak relative to the USD, particularly in countries like Turkey, Brazil, Russia, where they are about as low as they have ever been. It's no coincidence that these have been some of the worst performing countries of the past decade. Since early 2016, Russia and Brazil have outperformed the US by about 8% CAGR per year: https://www.portfoliovisualizer.com/bac ... ion3_3=100. Turkey has underperformed by 18% CAGR per year since then, so obviously it doesn't work for every country or hasn't started yet in Turkey.

I think this speaks more to the idea that the countries with the weakest currencies over the last several years to decades also tend to have stock markets that have performed poorly, and are therefore "value countries" in the same way some individual stocks become "value stocks".

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:04 am
by watchnerd
mbasherp wrote:
Thu Dec 05, 2019 9:38 am
In Vanguard’s 2020 outlook, they cite expected depreciation in the USD as one reason for expected international outperformance over the next decade. So while your friend’s method may seem arbitrary, Vanguard appears to be doing the same thing.

Personally, I don’t adjust my assets based on it but I’m not as concerned by underperformance of either class due to FX moves, because I expect that to reduce to noise over the long term.
They're sort of doing the same thing, but missing the market timing difficult by just having international stock exposure.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:06 am
by watchnerd
tictock81 wrote:
Wed Dec 04, 2019 4:35 pm
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this? I'm sure there's no free lunch, so I'm suspicious of such trickery - the vagaries of macroeconomics should wash-out any opportunities. However, it also seems a reasonable wager that an investment denominated in a weak currency could be profitable if purchased with a strong currency - the odds are neutral at worst and could be advantageous.

Assume:
1. Investor is based in the US.
2. The tilt is to new investment contributions only.
3. Global allocation of investments are rebalanced occasionally, but not often (every 2-5 years?)

Thanks in advance for your sagacious counsel.
Timing is hard.

If you believe currency strength / weakness impacts equity returns in a medium term, cyclical way, just put international in your AA.

I'm 50/50.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:11 am
by patrick013
One observation is equity gains due to change in the US dollar index. The index rose from the low 90's to the high 90's the last year. So he would be buying domestic stocks with large foreign business that have risen due to that. A contradiction in his strategy.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:14 am
by JoMoney
watchnerd wrote:
Thu Dec 05, 2019 10:04 am
mbasherp wrote:
Thu Dec 05, 2019 9:38 am
In Vanguard’s 2020 outlook, they cite expected depreciation in the USD as one reason for expected international outperformance over the next decade. So while your friend’s method may seem arbitrary, Vanguard appears to be doing the same thing.

Personally, I don’t adjust my assets based on it but I’m not as concerned by underperformance of either class due to FX moves, because I expect that to reduce to noise over the long term.
They're sort of doing the same thing, but missing the market timing difficult by just having international stock exposure.
Vanguard's made several changes in the LifeStrategy and Target-Date funds upping the international exposure over the past several years.
In 2013 they added international bonds, and then in 2015 changing from a 30% of equities to 40% of equities in international.
So far, it hasn't worked out that well (comparing the 60/40 LifeStrategy Moderate Growth with the all U.S. 60/40 Vanguard Balanced Index.
MStar Chart

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:15 am
by MotoTrojan
I also move funds to International when the dollar strengthens, because I rebalance :).

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:29 am
by DB2
Indeed it is marketing timing, but with the growing debt, massive deficits, and massive amount of QE needed for that next recession, it's hard to fathom how the dollar cannot get weaker.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:31 am
by watchnerd
DB2 wrote:
Thu Dec 05, 2019 10:29 am
Indeed it is marketing timing, but with the growing debt, massive deficits, and massive amount of QE needed for that next recession, it's hard to fathom how the dollar cannot get weaker.
If that's the hypothesis, just put international in your AA and wait. You don't need to predict the 'when'.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 10:36 am
by DB2
watchnerd wrote:
Thu Dec 05, 2019 10:31 am
DB2 wrote:
Thu Dec 05, 2019 10:29 am
Indeed it is marketing timing, but with the growing debt, massive deficits, and massive amount of QE needed for that next recession, it's hard to fathom how the dollar cannot get weaker.
If that's the hypothesis, just put international in your AA and wait. You don't need to predict the 'when'.
Agreed.

Re: US$ Strong/Weak Tilt Investing?

Posted: Thu Dec 05, 2019 9:04 pm
by abuss368
tictock81 wrote:
Wed Dec 04, 2019 4:35 pm
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this? I'm sure there's no free lunch, so I'm suspicious of such trickery - the vagaries of macroeconomics should wash-out any opportunities. However, it also seems a reasonable wager that an investment denominated in a weak currency could be profitable if purchased with a strong currency - the odds are neutral at worst and could be advantageous.

Assume:
1. Investor is based in the US.
2. The tilt is to new investment contributions only.
3. Global allocation of investments are rebalanced occasionally, but not often (every 2-5 years?)

Thanks in advance for your sagacious counsel.
Welcome to the Bogleheads.

Investment returns are a function of:
* Asset allocation
* Market timing
* Security selection

Most research shows asset allocation is the most import decision an investor could make. I suspect your colleague is in fact market timing.

Develop an investment portfolio built around the best asset allocation for your individual goals, timeframe, and tolerance for risk. Keep costs low and stay diversified. Then tune out the market noise!

Re: US$ Strong/Weak Tilt Investing?

Posted: Fri Dec 06, 2019 3:55 am
by Valuethinker
tictock81 wrote:
Wed Dec 04, 2019 4:35 pm
A coworker told me he tilts investing based on the relative strength or weakness of the US dollar. If the US dollar is strong, he buys foreign investments. If the US dollar is weak, he buys US investments. He supposes this allows him to use invest dollars wherever they are relatively most valuable. Even with the imprecision of what's "strong" or "weak", he's a believer in this tilt.

What's the Boglehead wisdom on this? I'm sure there's no free lunch, so I'm suspicious of such trickery - the vagaries of macroeconomics should wash-out any opportunities. However, it also seems a reasonable wager that an investment denominated in a weak currency could be profitable if purchased with a strong currency - the odds are neutral at worst and could be advantageous.

Assume:
1. Investor is based in the US.
2. The tilt is to new investment contributions only.
3. Global allocation of investments are rebalanced occasionally, but not often (every 2-5 years?)

Thanks in advance for your sagacious counsel.
I suspect he does not understand the difference between a foreign stock and a foreign currency investment.

This strategy works if you buy unhedged bonds or money market instruments and you can call currencies correctly.

If we buy swiss franc bonds our return on investment is in swiss francs.

Contrast that to Nestle of the 10 largest listed companies in the world and along w Royal Dutch Shell one of the largest holdings non US in a global equity fund.

It's not a Swiss franc stock except in its home listing and currency of dividend. Shell is a company HQd in UK and Netherlands but very little if its operations are there and it earns its money largely in USD.